Louisiana investors who use mutual funds to save for college, retirement or a rainy day could unknowingly be investing in high-risk Puerto Rico bonds.

Louisiana investors who use mutual funds to save for college, retirement or a rainy day could unknowingly be investing in high-risk Puerto Rico bonds, State Treasurer John Kennedy says.

State Treasurer John Kennedy

"Mutual funds and individual investors have been buying these bonds because they are listed as traditionally safe municipal debt,' which is exempt from federal and sometimes state and local taxes, and because Puerto Rico debt pays higher yields than other municipal bonds. But I worry about their safety," Kennedy says in a warning issued Tuesday.

The instability of Puerto Rico's economy, coupled with a credit rating one step above "junk," makes investing in the island a shaky proposition, according to the treasurer. In addition to suffering from a stagnant economy, Puerto Rico has a history of enacting policies like issuing debt to pay off short-term deficits and maintaining high unfunded pension liabilities.

While the island struggles financially, Morningstar Inc. estimates that 77 percent of municipal-bond mutual funds contain Puerto Rico debt. Oppenheimer Funds manages most of the mutual funds with ties to Puerto Rico, followed by Wells Fargo and Nuveen.

The Secretary of State in Massachusetts began investigating mutual fund companies earlier this month to see whether advisers adequately disclosed the risk involved with investing in Puerto Rico bonds. The Securities and Exchange Commission launched a similar review of several large mutual fund companies to look into disclosure and related issues.

"Most investors buy municipal bonds because they are looking for a safe bet," Kennedy notes. "Most investors also buy municipal bonds through a mutual fund, which owns hundreds of stocks and bonds. It can be very hard to know where your money is going. Louisiana investors need to know if they are holding Puerto Rico bonds. Otherwise, they could be unwittingly putting their hard-earned money at risk."